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Financial Mistakes to Avoid in Your 30s and 50s Douglas Carlsen, DDS

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I provided “Obstacles to Savings” in my April Dentaltown article. This month, I’d like to hone-in further on the mistakes both young and nearing-retirement dentists make.

Video supplements on this month’s topic are available on www.youtube.com/user/DrDougCarlsen. Alternatively, on the Dentaltown Web site, on the right hand column click on “Message Boards,” then “Finance,” then “Personal Finance.”

THE THIRTIES
Spending Without a Budget
The newly minted dentist, after years of no income suddenly has compensation that is much higher than the national average. It’s high time to celebrate! Family responsibilities are normally few. Extracurricular spending could involve dining out, entertainment, clothing, travel, new sports equipment, and of course, that new BMW. The dark side of this new financial independence involves taxes, credit cards, auto loans and student loans.

Here’s a quick way to broadly budget without spreadsheets or entering transactions into Quicken or Mint. Figures used below are approximate for the young dentist.

For the single employed dentist list the following:
  • Monthly take-home pay

  • Subtract out your monthly rent; auto loan payment; student loan payment; medical insurance payment; an additional $350 for auto insurance, repairs and fuel; $250 per month for groceries; and $500 per month for utilities including cell phone, cable and Internet.
For the single dentist who has purchased a practice, use the same numbers as above with the following changes:
  • Instead of take-home pay, use 65 percent of your net income (all taxes will average about 35 percent).

  • Include your practice loan payment minus the interest to your expenses.
For married dentists, use the above figures, yet double amounts for auto and groceries.

What’s left over is your “play money.” Be sure to know what this amount is. It’s most often between $500 and $2,000 per month. This money is for clothing, hobbies, sports, dining out, sporting events, concerts, gifts and vacations. If you have a firm mental idea of your total monthly “play money,” it will be much easier to not overspend.

Paying Bills Late
Habitually paying bills or credit cards late can severely sabotage one’s retirement savings. Maintaining a balance of $25,000 with 18 percent interest on credit cards, which is not unusual for a dentist, denies the dentist $465,000 in lost investment potential over a 30-year career. Second, late payments leave a negative mark on your credit score, which translates to higher costs for office, equipment and home purchase.

Third, you lose the goodwill of dental suppliers, labs, attorneys, tax and financial planners, and usually your staff. Worst of all, you lose confidence in yourself.

Money Secrets
For married dentists, secret accounts and not being open about debt and purchases is a huge no-no and often ends in divorce. Well before marriage, put everything on the table. The biggest risk to your financial well being is divorce. I tell clients to add six years to their working career for each divorce, and that’s conservative.

Emergency Fund in Place
A mistake many dentists make is not having an emergency fund in place before any other savings. Emergencies happen when least expected. A single bike or ski accident or other disability can cause years of financial turmoil. Disability insurance normally covers only about half of your net income and doesn’t begin for 90 days. Those 90 days can cut your income to zero or less for the entire year, requiring three to five years to pay off the debt accumulated. An emergency fund of $40,000+ for a dental family is essential.

Maintaining a High Debt-to-income Ratio
A prudent rule of thumb is Brian Hufford’s 25 percent rule regarding total debt.1 That is, one should not have more than 25 percent of family net income in personal and practice loan payments. If a young doctor earning $200,000 per year has student debt of $250,000 at six percent interest with payments of $2,900 per month, that’s $35,000 per year and 17.5 percent of the family’s income. With two car loans totaling $1,000 per month, or $12,000 per year, we creep up to $47,000 per year in debt payment. That’s 23.5 percent. Sorry, a home mortgage is out of reach.

High student loan debt makes it imperative in most instances for the young dentist not to purchase a home until after the practice purchase and only when student loans are either paid off completely or at a very low payment. There is enough stress on doctors in the first several years of owning a practice. To have monthly totals of $3,000 for student loans, a $3,000 mortgage, a practice loan of $6,000 and auto loans of $1,000, all totaling $13,000 per month, makes me sweat just writing!

Please heed my warning: To establish a lifestyle of revolving auto, home, practice and credit card debt severely debilitates one’s ability to grow wealth. Doctors in their late 40s still paying student loans with revolving credit card debt have a very long road ahead to financial freedom.

THE FIFTIES
Divorce
I list divorce as a mistake, yet there is often no mistake. It’s tough to place fault and it is devastating mentally. Financially, it’s the worst disaster a dentist can face other than permanent disability without insurance. For all professionals, divorce is common.

Fortunately or not, those who stay married tend to have more wealth. According to Thomas Stanley, PhD, author of The Millionaire Next Door series, “Among the 944 millionaires surveyed nationwide for Stop Acting Rich, 91 percent were married to the same spouse on average for 36 years. Fully two-thirds have never been divorced.2

30-year Fixed Mortgage
Taking out a 30-year fixed loan as you approach retirement will normally increase your retirement income need substantially. Without a mortgage, most dentists require in the neighborhood of $150,000 per year pre-tax income. Add in a mortgage and the income level increases anywhere from $30,000 to $60,000. In real retirement dollars, that’s $600,000 to well over $1,000,000 in additional funds. In years, it’s three to five more years of work. The reason for the new mortgage is often other debt.

Debt
 The dentist’s 50s is the time of life when income and potential savings are maximized. Normally the home is either paid off or nearly paid off, college fees are under control or gone, the practice is stable, and the dentist can save significantly more than any other life decade.

Please don’t fall prey to your ability to access more credit. Lenders love older practicing dentists. There’s little one can do in one’s 50s to leverage debt for increased retirement savings. Practice loans, second homes and new mortgages on the primary residence severely hamper savings.

Cash is king in one’s 50s. A 55-year-old dentist recently asked when he can finally buy that Porsche he’s dreamed of for years. The answer: anytime, as long as he pays in cash.

Beating the Market
 Taking risk to “catch up” with a portfolio that’s suffered over the years is poor strategy. Holding only individual stocks, commodities or putting all your eggs into real estate is not the answer.

Make sure to buy the whole market, not just what you feel might be the “hot” areas. Work with a financial planner or a discount broker that practices within the American Law Institute’s Prudent Investor Rule. In part it states:

Fiduciaries and other investors are confronted with potent evidence that the application of expertise, investigation, and diligence in efforts to “beat the market” ordinarily promises little or no payoff, or even a negative payoff after taking account of research and transaction costs.3

How best to invest now? From CBS MoneyWatch bloggers Allan Roth and Larry Swedroe: “Decide on an asset allocation between stocks and bonds that’s appropriate for you, ignore the scary headlines, and stick to your strategies during the tough times. Find some way to overcome your fear when the market goes down. After all, you're not just investing for the next year or two – you’re investing for the next 20 to 30 years.”4

References
  1. Brian C. Hufford, CPA, CFP, “Maximize Your Wealth: Improving Upon the Reality of Your Finances,” AGD Impact, February 2010.
  2. From Stanley’s blog downloaded at http://www.thomasjstanley.com/blog-articles/417/Dont_ Criticize_the_1%3B_Emulate_Them.html on June 25, 2012.
  3. Larry Swedroe, The Only Guide to Winning Investment Strategy You’ll Ever Need, 2005, Truman Talley Books, New York, NY, page 50.
  4. Downloaded from http://www.cbsnews.com/8301-505146_162-39945431/5-biggest-retirement- planning-mistakes/ on June 25,2012.
Author's Bio
Douglas Carlsen, DDS, has delivered independent financial education to dentists since retiring from his practice in 2004 at age 53.

For Dentists’ Financial Newsletter, visit www.golichcarlsen.com and find the “newsletter” button at the bottom of the home page.

Additional Carlsen Dentaltown articles are at www.towniecentral.com. Search “Carlsen.” Videos available at www.youtube.com/user/DrDougCarlsen. Contact Dr. Carlsen at drcarlsen@gmail.com or 760-535-1621.
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